Abstract
In the valuation problems presented in the previous chapters, the interest rate was assumed to be a deterministic parameter, constant in most cases. This is of course a crude approximation of the real situation where interest rates vary over time in an unpredictable way. This assumption can be reasonable only when dealing with financial contracts with short maturities (like options), while for financial derivatives with longer lifetime (like bonds) or any other fixed-income products, it can be quite misleading. It is necessary, then, to adopt stochastic models for interest-rate dynamics.
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© 2013 Springer International Publishing Switzerland
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Gianin, E.R., Sgarra, C. (2013). Interest Rate Models. In: Mathematical Finance: Theory Review and Exercises. UNITEXT(), vol 70. Springer, Cham. https://doi.org/10.1007/978-3-319-01357-2_10
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DOI: https://doi.org/10.1007/978-3-319-01357-2_10
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-01356-5
Online ISBN: 978-3-319-01357-2
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